I charge the stocks in my portfolio “rent.” And in today’s essay, I’ll show you how you can too.
After all, when you buy a stock, you expect it to move higher. But that can take time.
So you should charge your positions rent while they’re taking up space in your portfolio. It’s simple and takes just a few minutes a month to become a “portfolio landlord.”
My favorite thing about charging rent is that I’m essentially creating my own dividend. And you can even combine it with dividend stocks.
Last month, I showed you how an investment in McDonald’s is providing me with a growing cash payout every year that’s now in the double-digits.
That’s through the power of investing in stocks that pay growing dividends over time.
But there’s a way to potentially double the rent you charge on top of what companies already pay out.
That can be huge if you need income right now… or if you want to accelerate the compounding process.
It’s a strategy I use often. And in today’s markets, it can potentially provide you with thousands of dollars in extra income each month if used right.
I think of it as creating my own dividend. Or charging rent for the stocks I own. Either way, it means a good chunk of change over time.
Today, I’ll walk you through this strategy and how you can use it to improve your investment returns and boost your cash holdings.
This Strategy Will Boost Income on Stocks You Already Own
Right now, the quarterly dividend payment on my McDonald’s (MCD) shares is $1.52 per share. That works out to $6.08 per year.
At current prices, that’s a yield of 2.1%. It’s about 25% higher than the S&P 500’s dividend yield of 1.7%… and by no means a high yield.
But there’s a way we can double it. It’s called selling “covered” call options.
A call option is a contract that gives the buyer the right, but not the obligation, to buy shares. As the seller of the option, you have the obligation to sell shares.
A covered call uses a call option in conjunction with an existing share position. Since you own the shares you’re selling a call against, you can meet your obligation to sell shares without having to go out and buy them.
Simply put, for every 100 shares of a stock you own, you can sell a call option against those shares. (A standard option contract trades in units of 100 shares.)
That’s why you only want to sell call options in a ratio of one for every 100 shares you’re willing to commit to this strategy.
The money you receive for doing so is called the “premium.”
For example, last month I sold May 19 $310 calls against my McDonald’s shares.
Come May 19, if shares of McDonald’s are over $310, I’m obligated to sell my shares to the buyer of the option.
If the share price is lower, I’m not. It’s that simple. And I keep the $0.40 per share I received for making the trade.
Multiply that by 100, and each call option brought in $40 to my account.
I know that may not sound like much. It isn’t. But it’s an 0.13% return on the capital at risk.
And this is a call option that’s just one month out. So annualized, it comes out to a 1.65% gain.
And even with McDonald’s shares trending to new all-time highs in the past few weeks… The option has dropped in value to about $0.05, as of this writing with a week left until expiration.
If I wanted to completely avoid the risk of my shares being called away… I could buy back that option and keep nearly 88% of the option premium that I sold.
So far this year, I’ve made 40–50 cents per contract monthly using this strategy.
In total, I’ll clear about $2 per share in extra income once this May contract expires.
Going out the full year, I’ll likely make about $5 in income per share. Adding in the $6.08 in quarterly dividends, I’ll be looking at around $11 in income.
The good news? At current prices, that turns my income into a 3.8% return. That puts McDonald’s on the higher end of the income spectrum.
And based on my cost basis of $55 per share, I’m now getting back 20% of my initial investment each year.
At this rate, I would have recouped my initial stake in MCD in five years just from the income I’m getting from shares today.
That’s the power of using covered calls. It’s like charging rent on your stocks.
How to Strike the Right Balance of Risk and Reward
Of course, markets can be volatile. Each month, I have to look at where I expect McDonald’s shares to move and set a strike price accordingly.
I would’ve made more money each month using a strike price like $300 instead of $310. But I also would’ve had a higher risk of my shares getting called away.
That’s the trade-off with selling covered calls. You can generate steady income from them… but at the risk of your shares getting called away.
With some stocks, it may be worth it. With others, not so much.
Covered calls ensure that my portfolio’s cash continues to increase whether markets move up, down, or sideways.
I can use that cash for asymmetric trades like crypto or reinvest it in dividend growth stocks. If you’re retired, you could sell calls to increase your income, too.
Remember, selling covered calls does come with risk. Each options contract accounts for 100 shares of the underlying stock. So only trade the number of shares you’re willing to lose if they’re called away.
No matter how you cut it, there’s far more to income from the stock market than collecting dividends. And with covered calls, you can potentially double the income you’re getting from most stocks.
Good investing,
 |
Andrew Packer
Analyst, Palm Beach Daily
P.S. If you’re looking for a way to generate income, Daily editor Teeka Tiwari recommends a tiny subsector of crypto that will benefit from a coming “buying panic.”
Unlike most cryptocurrencies, these tokens are programmed to pay you monthly income on top of capital gains. And they’re set to benefit from a surge of activity coming to one of crypto’s largest networks.
During his special event, he explained what this catalyst is and what types of tokens will benefit from it. For a limited time, you can stream it right here.